Economic Growth, Environmental Issues and Trade

Abstract

This paper explores the implications for trade relations of the greening of world politics. It modifies the standard theory of changing comparative advantages in a growing world economy to show the effects on trade of taking into account the fact that the demand for domestic environmental policies increases as economies expand. The demands for environmental policies would not be a problem if they were confined to first-best policies. Trade problems arise, however, when those policies undermine an industry's competitiveness (from which protection is sought), or when a trade policy measure is adopted in an attempt to impose one's own standards on another country's environment, or when trade liberalization is opposed by environmentalists. The paper shows how all three unnecessarily threaten to undermine the global trading system and how, in the cases of coal and food, trade liberalization could well improve rather than worsen the global environment.